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Zelnor, Inc
Zelnor, Inc., is an? all-equity firm with 180 million shares outstanding currently trading for $14.09 per share. Suppose Zelnor decides to grant a total of 18 million new shares to employees as part of a new compensation plan. The firm argues that this new compensation plan will motivate employees and is better than giving salary bonuses because it will not cost the firm anything. Assume perfect capital markets.
a. If the new compensation plan has no effect on the value of? Zelnor's assets, what will be the share price of the stock once this plan is? implemented?
b. What is the cost of this plan for Zelnor? investors? Why is issuing equity costly in this? case?
Expert Solution
a) Computation of Share Price of the stock after the Implementation of Plan:
Share price when plan is implemented = Current Total Asset / ( Shares Outstanding + New Shares)
= ( 180,000,000 * 14.09 ) / ( 180,000,000 + 18,000,000 )
= 2.536,200,000 / 198,000,000
= $12.81
So, Share Price of the stock after the Implementation of Plan is $12.81
b) Computation of Cost of Plan for Zelnor Industries:
Cost of Plan = Current Number of Shares Outstanding * Share Price
= 180,000,000 * ( 14.09 - 12.81)
= 180,000,000 * 1.28
= $230,563,636.36
Issuing equity at price lower than market price or given as free to employees will always reduce the price.
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